Business decision-making of power generators in competitive electricity market

Abstract

This paper presents a theoretical framework for the business decision-making process of the power generators as price takers when considering the participation of energy storage. The framework assesses rational valuation, optimal sales strategies, and hedging options for power plants with and without a gross sales constraint. The valuation and optimal sales strategy problems are analyzed using a risk-neutral pricing approach, dynamic programming principles, and the trinomial tree model suitable for the regime switching model. The formulation of a price risk hedging scheme flexible and widely used over-the-counter electricity derivative, the electricity contract for difference, as a tool for hedging electricity spot price risk. The minimum variance hedge ratio and its corresponding hedging efficiency formula are derived. In the section of numerical simulations, we first use the EM algorithm to calibrate the electricity spot model based on electricity spot price data of Nord Pool. Numerical simulations are then conducted on the operational decision-making of power generators under three different forms of energy storage. The results of the simulations provide a basis for power generators to evaluate the real-time value of power plants, to select optimal real-time power sales, and to determine the optimal timing of power plant transfer and storage methods.

Keywords

• Power plant valuation
• Optimal power sales strategy
• Risk hedging
• Trinomial tree
• Dynamic programming principle